1. Extreme Sports sells logo sports merchandise. The company is contemplating whether or not to continue its custom embroidery service. All of the companys direct fixed costs can be avoided if a segment is dropped. The information is available for the segments.

	Custom Embroidery		Logo Apparel
Sales	$61,000		$251,000
Variable costs	30,000		109,000
Contribution margin	$31,000		$142,000
Direct fixed costs	23,000		40,000
Allocated common fixed costs	12,000		49,000
Net income	$(4,000)		$53,000

A. What will be the impact on net income if the embroidery segment is dropped?

Net income $___ (Decrease, Increase)

B. Assume that if the embroidery segment is dropped, apparel sales will increase 10%. What is the impact on the contribution margin and net income solely for the apparel?

Contribution margin	$___	Decrease, Increase
Net income	$___	Decrease, Increase

C. Identify one cost that is not relevant in this analysis.

(Common fixed costs, Direct fixed costs, Variable costs)

2. Sports Specialists makes baseballs and softballs in a three-step process. Unfortunately, the sewing machine process has been identified as a bottleneck. Each softball has a contribution margin of $9.00 and each baseball has a contribution margin of $3.00. The sewing machine can make 10 softballs or 25 baseballs in one hour.

A. If demand for both products is unlimited and the sewing machine capacity cannot be expanded. Calcuate the Contribution margin/hour for each product.

	Contribution Margin/hour
Softballs	$___
Baseballs	$___

Which product should be produced?

(Softballs, Baseballs)

B. If demand for each ball is limited to 6,000 balls and there are 800 hours available on the machine, how many of each product should be produced?

Softballs		___
Baseballs		___